MASTER THESIS
Servitization: a design research towards service-oriented mindset
A.H.J.M. (Sander) Wolbers S2030047
MSc. Business Administration
Entrepreneurship, Innovation and Strategy track Faculty of Behavioral, Management and Social sciences
First examiner Dr. R. (Rainer) Harms Second examiner
Dr. R.P.A. (Raymond) Loohuis
Document version Final
University of Twente
Enschede, the Netherlands
July 2020
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ACKNOWLEDGEMENTS
I would like to thank the people who helped and supported me with writing this master thesis.
Firstly, I would like to thank my family for supporting me throughout the time that I was writing my thesis as well as during my time at the University as a whole.
Secondly, I would like to thank everyone from the case organization that has helped me with interviews, providing me with necessary information and facilitating the research in general.
Thirdly, I would like to thank the industry experts who helped me with interviews.
Finally, I would like to thank my supervisors at the University for helping me in completing the master thesis through their feedback and ideas.
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ABSTRACT
The concept servitization can be achieved through business model innovation. Similar to the more broad concept of business model innovation, organizations face several drivers and barriers when servitizing. The barriers of business model innovation through servitization can be found in seven domains: Suppliers and partner network, Resource and capabilities, Customer relationships, Value proposition, Financial, Organizational culture and Strategy.
This research aims at creating an understanding of the key barriers to business model innovation through servitization for the case organization. The goal is to extract the most important barrier for the case organization from this prior developed understanding and to develop a method that can help the organization with overcoming this most important barrier.
The body of this research consists of a diagnosis, solution design and solution evaluation. In the diagnosis, empirical analysis through semi-structured interviews with managers of the case organization showed key barriers to business model innovation through servitization for the organization. Then, the diagnosis is completed with a theoretical analysis consisting of semi- systematic literature reviews through which the empirical findings are expanded on with the goal to come to a diagnosed problem. The diagnosed problem is a change in employee mindset from product-oriented towards service-oriented
In the solution design, theoretical insights, a book review and expert interviews help to develop an appropriate solution method for the problem of the case organization. The appropriate solution method for the diagnosed problem is to let the employees engage in a set of workshops that take the employees through all the behavioral change steps in order to achieve lasting change.
Lastly, a solution evaluation was proposed using insights from theory and expert interviews. The
proposed evaluation was to conduct a pre- and post-test of success factors that indicate the
necessary change in mindset through an evaluation form with open-ended questions.
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TABLE OF CONTENTS
Acknowledgements 2
Abstract 3
1 Introduction 6
1.1 Situational background 6
1.2 Case organization 7
1.2.1 Organizational overview 7
1.2.2 Exploring the problems of the case organization from an internal perspective 7 1.2.3 Exploring the problems of the case organization from an external perspective 8
1.2.4 Preliminary problem statement 8
1.3 The research approach 10
1.3.1 Criticism on traditional research approaches 10
1.3.2 The problem-solving cycle 11
1.4 Research outline 11
2 Conceptual background 13
2.1 Business models 13
2.2 Business model innovation 14
2.3 Barriers to business model innovation 15
2.4 Barriers to business model innovation through servitization 16
3 Methodology 20
3.1 Research design 20
3.2 Data collection 20
3.3 Semi-systematic literature reviews 21
3.3.1 Semi-systematic literature review approach 21
3.3.2 Theoretical analysis of the diagnosis 21
3.3.3 Solution design 22
3.4 Semi-structured interviews 22
3.4.1 Semi-structured interview approach 22
3.4.2 Semi-structured interviews in the diagnosis 23
3.4.3 Solution and evaluation design 24
3.5 Book review for solution design 25
4 Diagnosis 26
4.1 Empirical analysis 26
4.1.1 Customers 26
4.1.1.1 Need for more support 26
4.1.1.2 Customer relationship 27
4.1.1.3 Serve different segments 27
4.1.1.4 Time zone challenge 27
4.1.2 Competitive advantage 28
4.1.3 Employees 28
4.1.4 Finance 29
4.1.4.1 Source of revenue 29
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4.1.4.2 Financial challenges 29
4.1.5 Summary of empirical analysis 30
4.2 Theoretical analysis 32
4.2.1 Customers 32
4.2.1.1 Need for more support 32
4.2.1.2 Customer relationships 32
4.2.1.3 Serve different segments 32
4.2.1.4 Ability to serve global customers at any time 33
4.2.2 Competitive advantage 33
4.2.3 Employees 33
4.2.4 Finance 34
4.2.4.1 Source of revenue 34
4.2.4.2 Financial barriers 34
4.3 The diagnosed problem 35
5 Solution design 36
5.1 Exploration of potential solutions 36
5.1.1 Theoretical findings 36
5.1.2 Expert interviews 37
5.1.3 Solution choice 37
5.2 The workshop outline 38
5.2.1 Book review 38
5.2.2 Expert interviews 39
6 Solution evaluation 42
6.1 Theory 42
6.2 Expert interviews 43
7 Discussion 46
7.1 Interpretation of results 46
7.2 What was learned 46
7.3 Practical and theoretical contributions 46
7.3.1 Practical contributions 46
7.3.2 Theoretical contributions 47
7.4 Limitations and future research 47
7.4.1 Limitations 47
7.4.2 Future research 48
8 Conclusion 49
References 50
Appendix 1 Flowchart theoretical analysis 55
Appendix 2 Flowchart solution design 59
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1 INTRODUCTION
1.1 Situational background
Organizations these days need to keep up with ever-evolving markets, which are subject to the forces of increasing technological developments, globalization and competitive pressure. To keep up with the rapidly and continuously changing market, organizations should not just revisit their products but also their business model (Markides, 2006; Chesbrough, 2010; Teece, 2010; Zott &
Amit, 2010; Schneider & Spieth, 2013). The adjustment of an organization’s business model with the aim to gain or maintain a competitive advantage is also known as business model innovation.
Through business model innovation, organizations are able to adjust its’ business model in order to better facilitate the creation and capturing of value by exploiting the opportunities and mitigating the barriers in the market, thereby creating a competitive advantage (Chesbrough, 2007).
One of the industries that has been generating various and drastic new opportunities in recent years, is the manufacturing industry. Currently, the manufacturing industry experiences its fourth revolution, known as Industry 4.0, which fundaments lie in technological developments, progresses of ICT systems and internet-based connection of entire value chains (Kagermann et al., 2013;
Burmeister, Lüttgens & Piller, 2016). Furthermore, according to Manyika et al. (2019), in Industry 4.0 the role of manufacturers is changing: manufacturing promotes innovation, productivity and growth and rely more heavily on services in order to operate. Therefore, it is suggested that Industry 4.0 is not only driven by a technology-push through digitization, but also by a demand-pull through the addition of services to the organization’s core offering (Frank et al., 2019).
This shift towards the addition of services to the core offering is often referred to as servitization (Neely, 2011; Kowalkowski et al., 2017; Vandermerwe & Rada, 1988). Servitization requires fundamental change in the organization’s business model and is therefore intertwined in business model innovation (Kowalkowski, Witell & Gustafsson, 2013). A common example of business model innovation through servitization is Rolls-Royce’s “Power-by-the-hour”, through which customers are provided with an integrated combination of product and service that focuses on the output of this combination, as the name suggests: a fixed-cost-per-flying-hour basis. Moreover, the integrated solution that is created through a combination of products and services into one offering is referred to as a Product-Service System (PSS) (Tukker, 2004; Neely, 2009). Through a PSS, customers only receive the value inherently offered by the product use, also known as value-in- use, rather than receiving value-in-exchange through affording the cost of the product itself (Svensson & Grönroos, 2008). Rolls-Royce shows how the use of digitization , such as data-driven product optimization and preventive maintenance, into its PSS can maximize the provided value- in-use and thereby aligning the interests of the manufacturer and the customer (Smith, 2013). This deployment of digital technologies to support the transformation from a product-centric to a service- centric business model is referred to as digital servitization (Ardolino et al., 2018; Coreynen, Matthysen & Van Bockhaven, 2017).
It becomes clear that through Industry 4.0, business model innovation through servitization has
gained traction (Frank, Mendes, Ayala & Ghezzi, 2019). However, its implementation is not a
simple process and it introduces new risks to the organization (Gebauer et al., 2005; Benedittini,
Neely & Swink, 2015) According to Baveja et al. (2004), only 21% of organizations succeed with
service strategies and organizations are struggling to successfully innovate their business model
through servitization. Therefore, this research aims at providing theoretical and practical
contributions through researching alongside the servitization implementation process of a case
organization in the manufacturing industry in order to explore how manufacturing organizations
should overcome its barriers to business innovation through servitization in the era of Industry 4.0.
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1.2 Case organization 1.2.1 Organizational overview
Carrying out research in cooperation with a case organization is generally seen as an engaged scholarship approach that is often both rigorous and relevant and for those reasons valued highly (Van de Ven, 2007). This research was carried out in cooperation with a case organization
1that is operating in the manufacturing industry. The case organization is one of the top manufacturers of high-end industrial machinery. The machinery is assembled in-house in the organization’s facilities in the Netherlands and sold to businesses all over the world through direct sales and through dealers. The organization has been operating in this industry for over forty years and has around fifty employees. The market is segmented into two segments: around a dozen organizations that offer high-end machinery at a premium price are dominating the market, while a new stream of organizations are offering low-cost, low-quality machinery as an alternative. According to the case organization, these ‘budget players’ are not really competing in the same segment, as they are not able to meet the quality of the case organization’s machinery that is highly valued by the customers, and are therefore not be seen as a threat yet.
The current industry development of Industry 4.0 challenges the premium players to act on the opportunities that it fosters. The case organization has been following the competition comfortably in recent years. The product innovation in the market has become stale, while the entry of new budget competition from China is making its rise. This forces the premium players in the higher segment to find new ways to seek competitive advantages. The case organization has recognized that Industry 4.0 provides opportunities that can be exploited, although it is unsure in how to approach this. Moreover, it has recognized that its competitors are not yet exploiting opportunities that are fostered through Industry 4.0 and therefore acting on these could help the case organization in gaining a competitive advantage.
What makes this case interesting, is that the organization is at the brink of taking action towards exploiting the opportunities of Industry 4.0 and is open to innovate its business model through implementing servitization in the near future. Therefore, this research is able to accompany the business model innovation through servitization in real-time and allows for the collection of data from the organization throughout this process. This enables the research to propose a method that guides the business model innovation through servitization implementation process and to evaluate this method through experimental collaboration with the case organization.
1.2.2 Exploring the problems of the case organization from an internal perspective
In order to gain a better understanding of the problem that the case organization is facing, at the start of the research an intake meeting was conducted. The intake meeting has revealed several insights into the problems that the case organization has identified. Firstly, the organization recognizes that the exploitation of opportunities through Industry 4.0 technologies, such as the Internet of Things and remote service monitoring, allow the organization to expand its traditional value proposition. Continuing, the organization recognizes that customer needs are evolving alongside these industry developments and that, if not acted on the derivative opportunities, the traditional value proposition will not meet customer needs anymore. Moreover, the organization recognizes that it currently lacks distinctiveness from the growing competition and therefore the
1
Anonymization: In order to ensure confidentiality of the case organization and to protect the human subjects of this research, the choice was made to anonymize the names of both the organization and the informants.
Therefore, the case organization is referred to as ‘the case organization’ or simply ‘the organization’. The
interview informants are referred to as ‘Interviewee’ or ‘Expert’, followed by a number, in order to differentiate
between the different informants.
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organization does not have a competitive advantage. Furthermore, the organization foresees a saturation point of its current business model in the next two years. When this happens, sales are expected to drop, which puts pressure on the organization’s revenue and profitability.
Additionally, as a response to these problems, the organization has identified that the innovation of its business model may be needed. The organization recognizes a set of problems in business model innovation through servitization. The first problem that the organization sees, is that risky and high investments may be needed to accomplish business model innovation through servitization. Moreover, the organization foresees a problem in achieving the necessary change in employee mindset and organizational culture that fits the new business model, because employees are cemented in their traditional ways of working and are resistant to change. Lastly, a problem that the organization recognizes is that employees may need to develop additional capabilities, such as soft skills, to operate in a new business model.
1.2.3 Exploring the problems of the case organization from an external perspective
The goal of an external exploration is to focus on relationships between current industry developments and the wider organization, as well as the research topic (van Aken & Berends, 2018). It has become clear that in recent years the manufacturing industry has experienced a set of revolutionary developments, with the current revolution being Industry 4.0 (Kagermann et al., 2013; Burmeister, Lüttgens & Piller, 2016). Industry 4.0, according to Lasi, Fettke, Kemper, Feld and Hoffmann (2014), is characterized by the following fundamental concepts: Smart Factory, Cyber-physical Systems, Self-organization, New systems in the development of products and services, Adaptation to human needs and Corporate Social Responsibility. The exploitation of (some of) these concepts can help the case organization to solve (some of) the problems that it has identified in the intake meeting.
The suggestion that the case organization can exploit the fundamental concepts that encompass Industry 4.0 is in line with the literature, which suggests that these main features of Industry 4.0 are regarded to be a response to the industry challenges such as globalization, intensification of competitiveness, volatility of market demands, shortening of innovation and product life-cycles and increasing complexity of products and processes (Arnold, Kiel & Voigt, 2017; Bauer, Schlund &
Vocke, 2015).
The concern of the case organization to innovate its business model through servitization also seems to be in line with what the literature suggests: Consequently, new and adapted business models are needed (Kagermann et al., 2013). According to Ibarra, Ganzarain and Igartua (2018), business model innovation through Industry 4.0 follows three approaches: a service-oriented approach, a network-oriented approach or a user-driven approach. It appears that the foreseen business model innovation through servitization that the organization has identified resonates with the service-oriented approach, in which the focus lies on rethinking the optimal mix between products and services through a PSS and the use of a digital part of a hybrid solution as the added service in this PSS (Ibarra, Ganzarain & Igartua, 2018).
1.2.4 Preliminary problem statement
From the intake and external exploration, it becomes clear that the case organization is currently
subject to the developments of Industry 4.0, which provide both problems and opportunities that
manufacturing organizations need to act upon in order to keep up with the market. In order to
overcome the problems and exploit the opportunities that are generated through Industry 4.0, the
appropriate response appears to be business model innovation through servitization.
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However, the case organization foresees barriers to engage in business model innovation through servitization. More specifically, it initially sees a problem in the risky and high financial investments that are needed, the changing of the employee mindset and organizational culture towards being more service orientated and finally the development of the necessary additional capabilities of employees, such as soft skills, that are necessary to accommodate the innovated business model.
Although these barriers have been initially identified through the intake and external exploration, this does not mean that these represents the complete set of barriers. Moreover, the organization is unsure about how to overcome its barriers to business model innovation, as there appears to be a gap in the literature on the methods to overcome the identified servitization barriers as well as the effectiveness of such methods. Therefore, the research question that guides this thesis is:
How can the case organization overcome its most important barrier to business model innovation through servitization in the era of Industry 4.0?
Through dissecting this research question it appears that, in order to answer it, a further understanding of a number of different aspects needs to be created. First, an understanding must be created of what the barriers to business model innovation through servitization in the era of Industry 4.0 are. Through the intake meeting, some (aspects) of the barriers have already been suggested, but it is likely that through extracting what is known in the literature a more comprehensive overview of these barriers can be constructed. Furthermore, following the research question, the most important barrier for the case organization needs to be identified. Because this is specific to the case organization, empirical insights from the organization are helpful in diagnosing its most important barrier to business model innovation through servitization in the era of Industry 4.0. Lastly, in order to answer the ‘how’, the research question demands that the research proposes a tool or plan to action that the case organization can use in order to overcome its most important barrier to business model innovation through servitization in the era of Industry 4.0.
This generates the following sub-questions and their accompanying places in the thesis:
Chapter 2: Theoretical background
- What is known about the barriers to business model innovation through servitization in the era of Industry 4.0?
Chapter 4: Diagnosis
- What is known about the most important barrier to business model innovation through servitization in the era of Industry 4.0 for the case organization?
Chapter 5: Solution design
- What is known about the solutions to the most important barrier to business model innovation through servitization in the era of Industry 4.0?
Internal exploration External exploration
Preliminary Problem statement
FIGURE 1 – THE INTERNAL AND EXTERNAL EXPLORATION MERGE INTO THE PRELIMINARY PROBLEM STATEMENT
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- How should the solution to the most important barrier to business model innovation through servitization in the era of Industry 4.0 for the case organization look like?
Chapter 6: Solution evaluation
- What is known about the evaluation methods for the proposed solution to the most important barrier to business model innovation through servitization in the era of Industry 4.0 for the case organization?
- How should the evaluation method for the proposed solution to the most important barrier to business model innovation through servitization in the era of Industry 4.0 for the case organization look like?
- To what extent is the developed solution to solve the most important barrier to business model innovation through servitization in the era of Industry 4.0 for the case organization effective?
1.3 The research approach
1.3.1 Criticism on traditional research approaches
Results from academical research have received criticism from numerous researchers, practitioners and policy-makers for having little impact on practice or even the evolution of theory (Haertel & Means, 2003; Lagemann, 2002). The practical importance of academic studies is often weighted in too little. According to Dede (2005), this can be explained by the difference in priorities between scholars and those who are emerged in policy and practice. As a resolution to these problems, Dede (2005) suggests to conduct design research, which is most effectively executed through partnerships between researcher and educators immersed in the crucible of practice and bridging the gap between rigor (theory) and relevance (practice).
Research in which a tool or plan to action (artifact) is developed and evaluated is generally referred to as ‘design science‘ or ‘design research’. According to Laurel (2003), design research creates a place to braid theory and practice to make work stronger and is a method that of intervention that focuses on finding out rather than finding the already found. Design research, unlike traditional qualitative or quantitative research paradigms, follows an iterative design cycle that is the embodiment of three closely related activity cycles: The relevance cycle provides requirements from the contextual environment and allows the artifact to be introduced into this environment for evaluation, the rigor cycle provides theoretical grounding as well as domain experience and expertise from the knowledge base and adds the new knowledge from the research back into the knowledge base and finally the design cycle supports the research activity for developing and evaluating the design artifact (Hevner, 2007). This is visualized in below in Figure 2.
FIGURE 2 – DESIGN SCIENCE RESEARCH CYCLES (HEVNER, 2007)
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1.3.2 The problem-solving cycle
Although there is a variety of literature on approaches for design research, the general line of thought in design research remains similar. According to Offermann, Levina, Schönherr and Bub (2012), the literature on a design research methodology generally follows three phases: Problem identification, Solution design and Evaluation. While there are a number of literary resources that provide guidelines to design research along these phases, in consultation with the thesis examiner the choice was made to follow the problem-solving approach by van Aken and Berends (2018) as described in the book ‘Problem Solving in Organizations’. This approach resonates with the model of Hevner (2007) as it takes into account the interest of the case organization to solve its business problem. However, a higher emphasis is lied on the theoretical aspect in order to conform with the master thesis assessment. The problem-solving cycle model according to van Aken & Berends (2018) is presented in Figure 3.
FIGURE 3 - THE PROBLEM-SOLVING CYCLE (VAN AKEN & BERENDS, 2018)
1.4 Research outline
The problem-solving approach of van Aken and Berends (2018) suggests that, throughout the research project, (sub)assignments are completed by the researcher. These (sub)assignments produce deliverables, which are in accordance to the steps of the problem-solving cycle: a problem identification, a solution design and an evaluation design. A complete overview of the research outline and its corresponding deliverables are presented in Figure 4.
Learning &
Evaluation
Problem definition
Analysis &
Diagnosis Solution
design Intervention
Problem mess
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FIGURE 4 – RESEARCH DESIGN OUTLINE (ANSWERS TO SUBQUESTIONS IN GREEN)MASTER THESIS PAGE 13/59
2 CONCEPTUAL BACKGROUND
Through the conceptual background, a foundational understanding is developed through discussing key concepts that this research revolves around. The first concept that is addressed, is the concept of ‘business model’. Then, the concept of ‘business model innovation’ is touched upon.
Finally, a closer look is taken at the ‘organizational challenges to business model innovation’.
2.1 Business models
Throughout the literature, the concept ‘business model’ has been approached in a variety of ways.
Slywotsky (1996) defines the business model as ‘the totality of how a company selects its customers, defines and differentiates its offerings, defines the tasks it will perform itself and those it will outsource, configures its resources, goes to market, creates utility for customers and captures profits’. It appears that this description focuses primarily on the logic of creating and capturing value. Additionally, Stewart and Zhao (2000) approach the concept business model similarly as ‘a statement of how a firm will make money and sustain its profit stream over time’, thereby putting more emphasis on the sustainability of the organization. Mayo and Brown (1999) share this emphasis on sustainability but also concern competitive advantage, as they define business model as ‘‘the design of key interdependent systems that create and sustain a competitive business.’
Furthermore, Teece (2010) approaches the business model as ‘a design or architecture of the value creation, delivery and capture mechanisms of business’. This approach does not only concern the value creation and capturing as other studies suggests, but add a component of value delivery to be of importance in a business model. Moreover, Chesbrough and Rosenbloom (2002) propose that a business model is ‘the method of doing business by which a company can sustain itself—that is, generate revenue. The business model spells out how a company makes money by specifying its position in the value chain’. Not only does this definition concern value creation and capturing of organizations, but additionally show the relevance of specifying its relative position in the value chain.
Finally, Osterwalder (2004) suggests that a business model is ‘a conceptual tool that contains a set of elements and their relationships and allows expressing a company's logic of earning money.
It is a description of the value a company offers to one or several segments of customers and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenue streams’. This final approach seems to encompass most of what the other studies have found because it touches on value creation, value delivery, value capturing and sustainability. However, it appears that this approach does not include the element of competitive advantage. Therefore, as a consensus to the literature, the concept business model can be best described as:
A business model Is a design that specifies the position of an organization in a value chain as well as the logic and mechanisms through which value is created, delivered and captured in order to sustain a competitive and profitable business that generates revenue streams from customers.
Besides conceptualizing what a business model is, the theory also discusses what the function of
a business model is. According to Chesbrough and Rosenbloom (2002), the functions of a
business model are to articulate the value proposition, identify a market segment, define the
structure of the value chain, estimate the cost structure and profit potential, describe the position
within the value network and formulate a competitive strategy. Osterwalder (2004) adds to this by
suggesting a business model functions as a conceptual link, forming a triangle between strategy,
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business organization and ICT. Finally, a sound business model can form the foundation of organizational competitive strategy through which an organization is able to gain a competitive advantage (Teece, 2010; Chesbrough & Rosenbloom, 2002).
2.2 Business model innovation
In the previous paragraph, a better understanding of ‘business model’ as a concept was created.
Consequently, a closer look can be taken on the concept of ‘business model innovation’. According to Amit and Zott (2012), business model innovation can create a new a market or allow an organization to exploit new opportunities in existing markets. Moreover, business model innovation can provide a way for organizations to break out of intense competition and address disruptions that demand fundamentally new competitive approaches (Lindgardt, Reeves, Stalk & Deimler, 2009). Furthermore, it is argued that organizations need to commercialize industry developments through business model innovation in order to yield economic value from these (Chesbrough, 2010; Massa & Tucci, 2013). Although these studies show the current relevance of business model innovation in the light of the revolution of Industry 4.0, it is not explained what exactly business model innovation is.
According to Frankenberger et al. (2013), business model innovation can be defined as ‘a novel way how to create and capture value, which is achieved through a change of one or multiple components of the business model’. Massa and Tucci (2013) add to this by suggesting that business model innovation is twofold in that there is a differentiation to be made between business model design and business model reconfiguration: business model design refers to the entrepreneurial activity of creating, implementing and validating a novel business model for newly formed organizations, while business model reconfiguration refers to the activity by which managers reconfigure (or acquire) organizational resources to change an existing business model.
Clauss, Bouncken, Laudien and Kraus (2020) add to these findings by suggesting business model reconfiguration captures altered business models that differ from the extant business model in a range between incremental changes and radical new solutions. Therefore, the concept business model innovation can be best described as:
Business model innovation is the design of a new business model or reconfiguration of an existing business model in order to create and capture value from industry developments.
Through these findings, it becomes clear that organizations at a certain point need to determine if and how the innovation should be exploited: through reconfiguration of the current business model, through design of a new business model or not pursue the innovation altogether. While in business model reconfiguration organizations needs to identify what part of the existing business model needs to be reconfigured, in business model design the organization needs to determine if the existing business model is completely replaced or an additional venture with its own business model needs to be created (Amit & Zott, 2001; Chesbrough & Rosenbloom (2002); Teece (2010);
Frankenberger et al., 2013; Schneider & Spieth, 2013).
To carry out the aforementioned decisions, organizations must choose their business model
innovation approach. Euchner and Ganguly (2014) suggest a six step model that follows the
following steps: Demonstrate value creation, Generate business model options, Identify risks for
each option, Prioritize risks, Reduce risks through business experiments and Organize for
incubation. Furthermore, Geissdoerfer, Savaget and Evans (2017) propose an eight step
approach: Ideation, Concept design, Virtual prototyping, Experimenting, Detail design, Piloting,
Launch and finally Adjustment and diversification. Another approach to business model innovation
is to implement the innovated business model alongside the existing business model (Sosna et al.,
2010). Lastly, Chesbrough (2010) suggests the possibility to implement it in one go without the risk
-precautions of the other approaches. Through these findings, there appear to be three main ways
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to approach the implementation of business model innovation, going from least risky to most risky:
The first approach is to start implementation of the innovated business model through prototypes, experiments and pilots that do not actually affect the organization, secondly is to implement the innovated business model alongside the existing business model to limit the organizational consequences and the final approach is to implement the innovated business model in one go.
2.3 Barriers to business model innovation
In the previous paragraphs, a better understanding of the concepts ‘business model’ and ‘business model innovation’ was created. It is suggested that organizations can benefit greatly from business model innovation, which raises the question why not all organizations engage in it. One of the reasons that organizations refrain from business model innovation, is that there are barriers to business model innovation that need be overcome. Rüb, Bahemia and Schleyer (2017) set out research on business model innovation barriers by suggesting a differentiation between internal and external barriers to business model innovation: Internal barriers can also be viewed as ‘within the organization’, while external barriers often reach beyond the internal organization, for example barriers with relation to external parties such as customers or partners. Rüb, Bahemia and Schleyer (2017) also found that business model innovations that did not succeed are more often affected by external barriers than by internal barriers, which is presumably due to the fact that external barriers generally have a higher degree of uncertainty and thereby makes it more complex to prepare for these external barriers. However, it is argued that although external barriers affect the success of the implementation of business model innovation more strongly than internal barriers do, organizations often face a combination of both internal and external barriers (Rüb, Bahemia and Schleyer, 2017). In Figure 5, a visualization of the internal and external barriers to business model innovation according to the literature is presented.
There appear to be four main domains of internal barriers to business model innovation.
Chesbrough (2010) suggests that in the first of the four domains, the organizations face two significant barriers to business model innovation: the existing business model and its assets, and the managerial understanding of the barriers. Along the same line of thinking, Amit and Zott (2001) propose that engaging in the key aspects of business model innovation, namely ‘novelty, lock-in, complementarities and efficiency’, conflict with the traditional configuration of the organization’s assets and thereby threaten ongoing value to the organization.
Secondly, according to Bouchikhi and Kimberly (2003), the organizational identity is a main constraint on an organization’s adaptive capacity to business model innovation. They argue that an ambiguous organizational identity will result in internal conflicts and barriers to stable partner relationships, while a strong organizational identity brings competitive advantage.
Furthermore, research by Damanpour (1991) found that the factors formalization, centralization and vertical differentiation have a negative influence on innovation and subsequently business model innovation. With low formalization, more openness in order to let innovative ideas foster.
Vertical differentiation negatively influences communication and flow of information for innovative ideas. Centralization takes away the necessary power and authority from certain parts of the organization, thereby harming the fostering of innovative solutions.
Lastly, Masssa and Tucci (2013) suggest that business model innovation in incumbent
organizations are always influenced by the existing organizational structures. These incumbent
firms usually have established a dominant logic. This logic may be counterproductive to the
business model innovation, as it prevents the organization to think from different perspectives. The
dominant logic therefore subconsciously filters out everything that does not fit the current business
model, leading to path dependency along the lines of the current business model (Prahalad and
Bettis 1986, Chesbrough 2003). Therefore, it appears that the internal barriers to business model
innovation are the conflict with existing assets that provide ongoing value, the organizational
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identity, the formalization, centralization and vertical differentiation of the organization and finally the dominant logic that is embedded in the organization and its accompanying subconscious filtering process that leads to path dependency.
Moreover, literature on the external barriers of business model innovation seems to be more scarce. The reason for this could be that business model innovation is affected for a larger degree by internal factors than external factors, according to Rüb, Bahemia and Schleyer (2017).
Nevertheless, Rüb, Bahemia and Schlever (2017) found that external barriers to business model innovation can be categorized into five domains: Language and culture, Legal frameworks, Quality requirements, Finding the right partners and finally Customer adaption, follower disadvantages and competitors and stakeholders.
FIGURE 5 – BARRIERS TO BUSINESS MODEL INNOVATION
2.4 Barriers to business model innovation through servitization
Now that an understanding is created of the barriers to business model innovation, a closer look can be taken at the barriers that are specific to business model innovation through servitization.
Throughout the literature, various barriers to business model innovation through servitization are discussed, which was recognized in particular through the theoretical analysis (Chapter 4.2). Key research on servitization barriers overlap and can be placed in seven key domains: Suppliers and partner network, Resource and capabilities, Customer relationships, Value proposition, Financial, Organizational culture and Strategy (Figure 6).
Suppliers and partner network
One of the key barriers to servitization is the network in which the servitizing organization, its suppliers and its partners are operating. Firstly, through collaboration, all actors in the network have the expectancy to share in the risks, costs and revenues when services are launched (Kowalkowski & Kindström, 2013; Zhang & Banerji, 2017). However, not all changes in the relationship between the servitizing organization and its customers are reflected in the relationships with the organizations suppliers(Martinez et al., 2010). Furthermore, the transactional relationship prevents the external network from effectively supporting the integrated offering by the
Barriers to business model
innovation
Internal barriers
Existing assets Managerial understanding
Chesbrough (2010)
Organizational identity
Bouchiki and Kimberly
(2003)
Formalization, Centralization
and Vertical differntiation
Damanpour (1991)
Dominant logic subconscious and
filtering
Massa and Tucci (2013)
External barriers Rüb, Bahemia
and Schleyer (2017)
Language and
culture Legal
frameworks Quality
requirements Finding the right partners
Customer adaption Follower disadvantages Competitors/
Stakeholders
MASTER THESIS PAGE 17/59
servitizing organization (Martinez et al., 2010). This transactional relationship is embedded in the traditional supplying of goods rather than servitized offerings, which also requires a shift of mindset in the supply chain partners (Zhang & Banerji, 2017). Without this shift, it is difficult for the servitizing organization to get coordination and cooperation with the different actors in the network (Hou & Neely, 2013). Lastly, the servitizing organization often lacks understanding of how the actors in its network view their servitization initiatives (Kowalkowski & Kindström, 2013).
Resources and capabilities
Servitizing organizations often are faced with the barrier of a lack in the necessary resources and capabilities for servitization. Kowalkowski and Kindström (2013) argue that this is due to the challenge that servitizing organizations face in continuously adapting their resources and capabilities towards the changes in customer requirements and ICT developments. To cope with this, according to Kowalkowski and Kindström, three capabilities are needed: sensing, seizing and reconfiguring. Sensing is the capability to collect relevant information about new customer needs and the value of new services, seizing is the capability to capture and realize service innovation opportunities and reconfiguring is the capability to effectively transform resources, processes and operational skills (Kowalkowski & Kindström, 2013). Hou and Neely (2013) add to these findings by suggesting that servitizing organizations often lack expertise, understanding of the customer and innovative ability as well as have difficulty in knowledge and information management.
Furthermore, Zhang and Banerji (2017) stress the importance of servitizing firms to leverage the workforce and materials across departments as well as to acquire new resources in order to reconfigure the internal structure. Moreover, Martinez et al. (2010) suggest that performance metrics should be adapted to measure the organizations collective ability to deliver the integrated offering, as the traditional manufacturing based metrics are not suitable for measuring PSS. Lastly, it is required to align product and service design processes in order to design integrated offerings and respond effectively to customer needs (Martinez et al., 2010).
Customer relationships
Customers are often highlighted in the literature as one of the main drivers or barriers to servitization (Kowalkowski & Kindström, 2013). The key problems that arise as a barrier to servitization, are that it is difficult for servitizing organizations to receive cooperation and acceptance from customers (Hou & Neely, 2013). This can usually be explained by the heterogeneous customer demand and their lack of trust in the servitizing organization (Hou &
Neely, 2013). The reason that these factors are difficult for the servitizing organization to deal with, is that the human-based performance of servitization often involves unstable factors that can be disadvantageous for the long-term relationship and lacks control over customer behavior (Zhang
& Banerji, 2017; Hou & Neely, 2013). Moreover, in order to overcome these barriers, servitizing organizations need to gain an in-depth understanding of the buying centre, create new customer touch points and mutual adaptation towards servitization is required (Kowalkowski & Kindström, 2013).
Value proposition
Challenges with regards to the value proposition that accompanies servitization can provide a
barrier to servitization. Martinez et al. (2010) suggests that the product-centric orientation of the
value proposition has to be replaced with a service-centric orientation, which can be inhibited by a
lack of organizational responsiveness and requires multiple touch points between provider and
customer. By moving from basic field services to an integrated PSS, the value proposition shifts
from product oriented towards process orientated and from input based towards output based,
thereby becoming more service-centric oriented (Kowalkowski & Kindström, 2013). Furthermore,
Kowalkowski and Kindström (2013) suggest that the more service-centric the value proposition
becomes, the more complexity and risk is introduced as resources, capabilities and actors need to
MASTER THESIS PAGE 18/59
be integrated and coordinated. Moreover, the servitizing organization needs to find a balance within the portfolio between what services to offer and how extensively, which requires co-creation with customers and suppliers instead of unidirectional value delivery (Zhang & Banerji, 2017).
Lastly, Hou & Neely (2013) imply the difficulty in designing a service package and the measurement of such services.
Financial
Through servitization, the servitizing organization faces a variety of barriers with relation to finances. Firstly, it is recognized that servitization allows for a better alignment with the customer value creation process through value-in-use, but that the servitizing organization needs to be able to manage traditional pricing schemes and revenue mechanisms in parallel with the new methods, which provides higher value potential but simultaneously higher financial risks (Kowalkowski &
Kindström, 2013; Hou & Neely, 2013). Zhang and Banerji (2017) suggest that servitized organizations need an increased investment in order to facilitate the business transformation, which could offset financial returns in the early stages. Moreover, Hou and Neely (2013) add to this by suggesting that servitizing organizations often face unexpected costs and may suffer from the servitization paradox: a servitized organization that generates higher revenues than pure manufacturing organizations, but delivers lower profits. This also is in congruence with the finding that servitization does not necessarily increase the chance of business survival (Zhang & Banerji, 2017). Furthermore, it was suggested that it is difficult to price services and that therefore an integrated costing and pricing system needs to be redeveloped for the PSS (Hou & Neely, 2013;
Zhang & Banerji, 2013). Lastly, there is a raised possibility of customer disagreement on the prices of the PSS, because the costing and pricing mechanisms are mainly related to the value created and therefore the prices of the PSS are often much higher than the sum of production costs (Zhang
& Banerji, 2017).
Organizational culture
One of the main barriers to servitization that becomes clear from the literature, is the change that needs to occur with regards to the organizational culture. Hou and Neely (2013) suggest that servitizing organizations often lack a service oriented culture and find it difficult to build this necessary service oriented organizational structure and culture, because the organization innates an internal resistance to servitization and a resistance to change. According to Martinez et al.
(2010), this can be explained by the finding that traditional manufacturers often have a strong technology orientation that inhibits the transformation towards a service oriented culture. Zhang and Banerji (2017) support these findings and suggest that shifting from a product-centric mindset and culture towards a service-centric mindset and culture is a key challenge to servitizing organizations.
Strategy
The final barrier that has been recognized among the literature, is the barrier of strategy.
Kowalkowski and Kindström (2013) suggest that the servitizing organization faces a strategic
challenge in creating internal awareness and a sense of urgency within the organization. Moreover,
it was suggested that a shift towards innovative services, such as output based services, can lead
to reduced product sales and cause conflict with the strategy of the traditional product business,
as their goals are partially incompatible. Martinez et al. (2010) mentions that another strategic
challenge of servitizing organizations is that the absence of internal cooperation, common
language and strategic alignment within the organization can slow down the efforts of the
transformation towards servitization.
MASTER THESIS PAGE 19/59
FIGURE 6 – BARRIERS TO BUSINESS MODEL INNOVATION THROUGH SERVITIZATIONBarriers to business model innovation through servitization
Suppliers and partner network
Value network Kowalkowski and Kindstrom (2013)
Supplier collaboration Zhang and Banerji
(2017)
Competitors, suppliers and partners Hou and Neely
(2013)
Supplier relationships Martinez et al.
(2010)
Resources and capabilities
Resources and capabilities Kowalkowski and Kindstrom (2013)
Resource utilization Zhang and Banerji
(2017)
Knowledge and information Hou and Neely
(2013)
Internal processes and capabilities
Martinez et al.
(2010)
Customer relationships
Customer relationships Kowalkowski and Kindstrom (2013)
Customer management Zhang and Banerji
(2017)
Customers Hou and Neely
(2013)
Value proposition
The service offering Kowalkowski and Kindstrom (2013)
Value proposition Zhang and Banerji
(2017)
Products and activities Hou and Neely
(2013)
Delivery of integrated offering
Martinez et al.
(2010)
Financial
Revenue mechanisms Kowalkowski and Kindstrom (2013)
Financial risks, costing mechanisms
and pricing mechanisms Zhang and Banerji
(2017)
Finance Hou and Neely
(2013)
Organizational culture
Structure Kowalkowski and Kindstrom (2013)
Culture change Zhang and Banerji
(2017)
Organizational structure and culture.
Hou and Neely (2013)
Embedded product- service culture Martinez et al.
(2010)
Strategy
Service strategies Kowalkowski and Kindstrom (2013)
Strategic alignment Martinez et al.
(2010)
